The prospect of becoming one of the lead food suppliers to China has been nurtured both by the Russian government and the country's private sector. In particular, it chimed well with the so-called Turn to the East policy championed throughout the Russian media following the imposition of EU/US sanctions in 2014.

To date, the policy has met with a number of successes. Russia, for instance, is now the prime supplier of sunflower oil to China. Similarly, Miratorg, Russia's largest meat-processing company, now supplies corned beef to the mainland, while several Russian ice-cream suppliers have made distinct inroads into Shanghai and Heilongjiang.

Perhaps most ambitiously, though, Rusagro, one of Russia's leading agricultural businesses, has now announced plans to invest US$1 billion into milk production in the country's Far Eastern region, with an eye on supplying China and a number of other Southeast Asian markets. If successful, the plan would see Rusagro emerge as Russia's largest milk producer. It would also have a considerable impact on this outlying region of Russian, an area that has long suffered economically on account of its remote location and complex logistics requirements.

In order to deliver on its ambitions, Rusagro will need to relocate some 70,000 cows to the region, with a capacity for producing approximately 500,000 tons of raw milk annually. This volume would meet the shortfall of milk and dairy products in the region and leave some 250,000 tons available for export purposes. Overall, the climate, soil and landscape of the region are seen as highly suitable for dairy farming. On the downside, though, the area is subject to occasional monsoons and floods, while its underdeveloped infrastructure and lack of a ready workforce also pose a number of challenges.

According Rusagro's senior management team, although there has been interest from both South Korea and Japan, it is Chinese buyers that have proved the keenest. This is seen as largely because of the many problems China's domestic dairy producers face, including soil and water ecology issues, supply of cattle feed and the proper utilisation of cattle waste.

Having learnt the lessons of the past, Rusagro is also keen to access a diverse number of export markets as a means of offsetting the risk associated with currency fluctuations and changes in individual market conditions. The Russian dairy industry struggled hugely on account of cheap imports of subsidised EU milk products, which remained cheaper than domestically produced products even after the 2014 and 2015 devaluation of the rouble.

Perhaps the biggest problem is that – officially, at least – Russian dairy exports are banned on the mainland, except for ice-cream and via a number of semi-legal routes into Shanghai and Guangzhou. In 2016, China accounted for just 1.7% – some 736,000 tons – of Russia's exports of dairy products. This, however, represented a year-on-year rise of 350% in terms of the raw milk used.

In part, this rise is down to individual residents in the Heilongjiang and Jilin provinces. Given the shortages in these regions, it is not unusual for residents to travel to the border with Russia to buy dairy products, with each individual entitled to a duty-free daily allowance of 50kg.

Even should the relationship between Russia and the EU becomes normalised, this will have little benefit for the country's domestic dairy industry. The EU has long subsidised and supported the dairy industries of its own constituent nations, to the extent that Russian producers just cannot compete.

Since the sanctions were imposed three years ago, the Russian dairy industry has developed hugely. As a result, many of the players in the sector would be sure to take a proactive approach in discouraging the distribution of EU-sourced milk, cream, butter, cheese and yogurts within Russia's borders.

Given the situation, there are clear prospects for Hong Kong-based distributors with experience of the mainland market to work with Russian food producers, including Rusagro, on accessing China's retail food chains and wholesale food distribution centres. As most Russian dairy manufacturers now have considerable experience in freezing products destined for warmer climates, without impairing the produce, refrigerated delivery across the whole of the mainland is now a wholly viable option.

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